Final answer:
The interest rate actually earned by bondholders is known as the effective rate. It reflects the actual yield an investor receives based on the prevailing market interest rates and the price paid for the bond, which may differ from the bond's stated or coupon rate. Option 3.
Step-by-step explanation:
The interest rate actually earned by bondholders is called the effective rate(3). Bonds are a form of debt security under which the issuer owes the bondholders a debt and, according to the bond's terms, is obligated to pay interest, which is known as the coupon. The bond also has a maturity date at which the principal amount is due. The effective rate reflects the actual yield an investor receives based on the price paid for the bond, which may differ from the coupon rate due to changes in market interest rates.
For example, if a bond was issued when the market interest rate was 5% with a coupon rate of 5%, it would pay $50 annually on a $1,000 par value. If market rates drop to 3.5%, the bond's coupon payments are more attractive, and the bond's price may rise until its yield aligns with the market, giving an effective rate closer to the new market rate. Conversely, if the market rates rise, the bond's price may decrease, and its yield would increase, providing a different effective rate.